Big Three, Meet the "Little Eight"

How foreign car factories have transformed the American South.

The central Kentucky town of Georgetown, just north of Lexington, used to be known for the state's two main exports: bourbon and horses. Legend holds that in 1789, somewhere nearby, Elijah Craig, a Baptist minister, distilled the first batch of bourbon in charred oak casks. Thoroughbreds graze and trot across fenced fields of trim bluegrass on the horse farms that ring much of the city. But in the past 20 years, a different type of horsepower—the kind generated by Camrys, Avalons, and Solaras—has transformed Georgetown from a quiet country town into a booming suburb and export engine. In 1986, Toyota—lured in part by nearly $150 million in tax breaks and other incentives—built a massive manufacturing plant here.

And in the years since, the bucolic landscape has been transformed. The 1,300-acre plant in which Toyota has invested $5.3 billion produces a car roughly every minute. Georgetown's population has doubled. In fields where farmers once grew tobacco and raised cattle, McMansions, apartment complexes, and condominiums have sprouted. A 150,000-square-foot upscale retail center is rising near the Toyota plant, the better to serve its 7,000 employees. "There is no doubt the state's investment in Toyota has repaid itself many times over," says state Sen. Damon Thayer, a Republican who represents Georgetown in the Kentucky General Assembly.

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To be sure, the Georgetown plant isn't immune from the problems that have brought America's domestic manufacturers in Detroit to the brink of disaster. It recently furloughed 250 temporary employees and has throttled back production. But Brian Howard, 42, a team leader in painting operations and a 20-year veteran of the plant, is pleased with the way things are going. He enjoys high wages and cheap health insurance—$74 per month for his family. "They've told us for years that they've planned for a rainy day," he said. "Well, it's here and we're still doing well compared to the Big Three."

Time was, the Big Three were the U.S. auto industry. No longer. Over the past two decades, enticed by cheap labor and massive incentives, a second auto industry has emerged: nonunion, Southern-based, and foreign-owned. Large plants, with names of Asian and European carmakers emblazoned upon them, now dot the Southern landscape. By moving aggressively into Kentucky, Tennessee, Alabama, Mississippi, South Carolina, Georgia, and Texas, foreign manufacturers—call them the "Little Eight"—have transformed the economic geography of the nation's auto industry and the political debate surrounding its future.

To hear the rhetoric wafting down from Capitol Hill of late, you'd think that Toyota, Hyundai, BMW, and the rest are as all-American as Mom and apple pie. And in many ways, they now are. Sen. Mitch McConnell of Kentucky made an impassioned plea on the Senate floor for his colleagues to oppose the $15 billion aid package the House of Representatives had approved for General Motors, Ford, and Chrysler. "Labor costs need to be brought on par with companies like Nissan, Toyota, and Honda—not tomorrow, but immediately," he said. By the weekend, McConnell and fellow anti-bailout Republicans like Richard Shelby of Alabama and Bob Corker of Tennessee had stopped the bailout bill in the Senate.

The Southerners seem to have chosen an especially precipitous time to pick their fight with the Detroit Yankees: Without the money, General Motors and Chrysler have warned that they might be forced to file for bankruptcy protection. Harley Shaiken, a labor economist at the University of California-Berkeley, says a Detroit meltdown, on the eve of Christmas and in the midst of the worst job market in modern memory, "would be a devastating anti-stimulus package."

The anti-bailout lawmakers are all Republicans possessed of a deep-seated antipathy to organized labor and angry at the way the government has bungled the financial bailout. But they and many of their counterparts in the Senate have become experts on the labor practices of foreign manufacturers, because they've seen them up close. The tussle over the bailout has evinced what at first blush may seem a new kind of provincialism that pits Democrats and a few Republicans (like Sen. George Voinovich of Ohio) from heavy union and Big Three states against Republicans from right-to-work states in the old Confederacy. While McConnell & Co. oppose federal subsidies for the Big Three at the federal level, the states from which they hail have generously extended billions of dollars in subsidies to foreign automakers.

But there's a deeper cleavage at work here. Today's Southern solons have watched their local economies blossom thanks to a younger, more-vibrant auto industry unencumbered by the Big Three's legacy costs and union work rules—a sort of anti-Detroit that has the flexibility and ability to turn profits by making the types of cars that Americans actually want to buy.

Of course, the foreign companies are confronting the same difficult market situation as Detroit. Car sales, hammered by a lack of credit and low consumer confidence, are down across the board this year. In November, sales of Toyotas were off 34 percent; today, a financial planner's billboard in Smyrna, Tenn., seeks the business of Nissan employees who are taking the company's buyout offer of up to $125,000. In San Antonio, the Toyota Tundra plant lay idle for three months this fall, though Toyota hasn't laid off anyone. Instead, according to Richard Perez, president and CEO of the Greater San Antonio Chamber of Commerce, Toyota offered the city "a whole bunch of folks who need to get busy." (San Antonio put them to work on beautification projects.) Of course, Toyota has resources to act in a more paternalistic manner—in part because the parent companies aren't saddled with the burdens of providing health care and retirement for workers in home markets.

Despite the downturn, the foreign automakers—and the states in which they operate—are much better situated than Detroit. At a time when the South's core industries, like textiles and apparel, were going offshore, foreign automakers grew to become crucial contributors to the region's economy. Through 2007, Toyota had invested more than $17 billion in 10 U.S. production facilities, which collectively employ more than 36,000 workers. Alabama, which didn't make a single car in 1995, last year produced 800,000, making it the fifth-largest auto-producing state. Tennessee just landed a $1 billion commitment from Volkswagen to set up a huge new plant in Chattanooga. South Carolina's Upstate section has been remade from a faded textile territory into a thriving 21st-century industrial powerhouse since the arrival of BMW in the 1990s. (The German automaker produces the X5 and X6 crossover coupes in the state.) "BMW offers the best manufacturing jobs in the region," says Republican Rep. Bob Inglis. "They're just a godsend for Upstate South Carolina." One measure of the love Inglis' constituents feel for BMW: On the Greenville Convention and Visitors Bureau Web site, the BMW plant has joined Shoeless Joe Jackson Memorial Park as an attraction.

The arrival of these car companies has had a huge ripple effect. "Every job in auto production supports five other jobs in the economy in steel, tires, rubber, programmers, and auto dealers," says Robert Scott, senior international economist at the Washington, D.C.-based Economic Policy Institute. Toyota's Kentucky operations support 28,000 jobs in the state. In 2007, according to the Association of International Automobile Manufacturers, foreign automakers employed 92,700 workers directly and 574,500 indirectly, accounting for 33 percent of U.S. auto production. By contrast, the Big Three employ about 240,000 workers.

The foreign automakers first came to these shores in the 1980s. Many wanted a foothold in the world's largest consumer market. But in a period when there was rising hostility to imported cars—it wasn't uncommon to see Japanese-made cars destroyed for sport in Michigan in the 1980s—establishing U.S.-based manufacturing plants was a way for Toyota and its peers to defuse international trade tensions, insulate themselves from the swings in the current market, and avoid the impact of any tariffs. And the states in the Southeast had plenty to offer—large tracts of undeveloped land with road, rail, air, and sea access; fewer snow days; and federally subsidized power from the Tennessee Valley Authority.

Above all, these states had longstanding cultures that made it difficult for unions to organize. "When the manufacturers were deciding where to open plants, they chose right-to-work states because they wouldn't have to use union labor," says U.S. Sen. Johnny Isakson of Georgia. Indeed, none of the major auto-assembly plants in the South is unionized. Like so many politicians whose states have benefited from the kindness of these strangers, Isakson now sees the world through the eyes of his new constituents. "Foreign automakers have been operating at gas prices being four, five, six dollars a gallon for years," he says. "The motivation to build fuel-efficient cars has really been around for more than two decades. But the U.S. manufacturers never supported that." (It's worth noting, however, that the senator drives a Ford Escape hybrid.) Many of the region's political leaders are now conversant with such topics as German engineering and Japanese models of continuous improvement, and they can speak chapter and verse on how these new plants are designed with flexibility—i.e., they can adjust production of models depending on consumer tastes and market conditions, whereas Detroit's plants, by and large, can't be retooled as easily to produce different models.

Locating production in areas with no history of car manufacturing was asking foreign companies to take a huge—and expensive—leap of faith. And so, to close the deal, the states began to offer huge financial incentives. In the early 1990s, competition escalated into a new war between the states—only this time the weapons were tax abatements, worker-training grants, and promises to build roads.

Alabama, for one, has forked over nearly $1 billion over the past decade and a half on such incentives. (Much of that sum has been spent on worker training.) But in return Alabama has attracted $7 billion of investment for automakers and suppliers. In the early '90s, the state was starving for investment and high-paying jobs, and so it pulled out all the stops to attract Mercedes-Benz, offering a $253 million incentive package in exchange for a plant that would employ about 1,500 people. When the plant opened in 1993 in the town of Vance, halfway between Tuscaloosa and Birmingham, 70,000 applications were filed for the 1,500 jobs. Little did Mercedes know at the time, but it was kicking off an economic revolution that has rolled like the Crimson Tide to every corner of the state. Auto-parts suppliers followed Mercedes' lead—and so did Honda, Toyota, and Hyundai. "When Alabama first announced it was paying $169,000 per job to attract Mercedes-Benz, everyone felt they were nuts," says Andy Levine, president of DCI, a New York-based firm that specializes in economic-development marketing. "Fifteen years later, it's probably the smartest investment any state has ever made." Indeed, "last year, combined, all these companies supported a payroll of $5.2 billion," says Neal Wade, director of the Alabama Development Office.

And while the Big Three frequently exhibit an air of entitlement when dealing with the state and federal governments—remember the disastrous private-jet caravan when the CEOs came to cry poverty in Washington?—the foreign automakers have gone out of their way to ingratiate themselves with their new hosts. BMW has endowed professorships at Clemson University's new automotive-engineering program. And when Alabama and Louisiana were competing to attract German steel giant ThyssenKrupp, Mercedes-Benz U.S. CEO Bill Taylor flew to Germany on his own dime to make the successful case.

It's hard to overstate the economic impact that a new plant can have. Before Nissan arrived in Smyrna in 1983, it was a sleepy town of about 6,000. Today, many of Smyrna's 40,000 residents are engaged in production of the Nissan Altima, Xterra, and Pathfinder. "Life is more convenient now because of everything that has come here, and the income that people have made working at the plant has been great," says Bruce Coble, an Assembly of God pastor who moved to Smyrna after Nissan arrived. When we spoke to Coble last week, he was visiting Gold Street Automotive, a repair shop, where the motto is "As Close to Heaven as Your Car Can Get."

Newsweek's Daniel Stone, Catharine Skipp, Patrick Crowley, Leon Alligood, Frederick Burger, and Temma Ehrenfeld contributed to the story. A version of this article also appears in this week's issue of Newsweek.